GARP Meeting Frankfurt. Liquidity Transfer Pricing. 18 October 2012, Frankfurt. Dr. Robert Fiedler, LRC & Carsten Krah, SAS

Transcription

1 GARP Meeting Frankfurt Liquidity Transfer Pricing 18 October 2012, Frankfurt Dr. Robert Fiedler, LRC & Carsten Krah, SAS Liquidity Risk Corp. Dr. Robert Fiedler Transfer Pricing p 1 / 28 LRC GmbH & Co. KG do not distribute - robert.fiedler@liqriskc.com

2 LRC / Robert Fiedler focuses on liquidity risk since more than a decade consults banks on liquidity risk methodology & policy & implementation gives training courses and in-house seminars has successfully built liquidity risk software solutions for several banks client list: BNPP Fortis Brussels / Dexia Brussels KBC Brussels / Den Danske Copenhagen / Commerzbank Frankfurt / Deka Frankfurt / Deutsche Bank Frankfurt / Deutsche Bundesbank Frankfurt / Deutsche Verkehrsbank Frankfurt / DZ Bank Frankfurt / European Central Bank (ECB) Frankfurt / HeLaBa Frankfurt / ING DiBa Frankfurt / Sparkasse 1822 Frankfurt / HSH Nordbank Hamburg / NordLB Hannover / Barclays London / CEBS London / Financial Stability Autority London / HBoS London / HSBC London / Lloyds Bank London / RBoS - Royal Bank of Scotland London / Deka Luxembourg / European Investment Bank Luxembourg / Santander Madrid / Bayerische Landesbank Munich / Hypo Real Estate Munich / Glitnir Reykjavic / Kaupthing Reykjavic /Bausparkasse Wuestenrot Schwaebisch Hall / Erste Bank Vienna / BPH Warszawa / BRE Bank Warszawa / PKO Bank Warszawa / Credit Suisse Zurich / ZKB Zurich robert.fiedler@liqrisk.com Liquidity Risk Corp. Dr. Robert Fiedler Transfer Pricing p 2 / 28 LRC GmbH & Co. KG do not distribute - robert.fiedler@liqriskc.com

3 Transfer Price - Definition a transfer price is the price at which goods (or services) are sold between divisions of a company, or between companies which have the same parent company (group) for a bank: every originated transaction (e.g. a loan or a deposit) needs to be replicated such that the assets & liabilities in the balance sheet still match: average funding rate: each asset is assumed to be replicated at one interest rate congruent replication * ) each individual asset (or liability) is assumed to be replicated * ) a.k.a. match funding Liquidity Risk Corp. Dr. Robert Fiedler Transfer Pricing p 3 / 28 LRC GmbH & Co. KG do not distribute - robert.fiedler@liqriskc.com

4 Average Funding Rate mainly used in classical asset driven banks: typically used to replicate assets only (hardly applicable to liabilities) each asset replicated at the average funding rate (AFR) of the bank average funding rate challenges: the current AFR is a blend of historical liabilities AFR looks only backwards and averages the history AFR does not denote the term structure of assets a future change of the balance sheet changes the AFR and thus the P&L (of existing deals) AFR assumes that the current liability mix will prevail when funding new assets possibly the wrong steering impulse if e.g. a growth in assets can only be refinanced at higher market rates Liquidity Risk Corp. Dr. Robert Fiedler Transfer Pricing p 4 / 28 LRC GmbH & Co. KG do not distribute - robert.fiedler@liqriskc.com

5 Matched Replication every originated transaction (asset or liability) is hypothetically duplicated with an individual replication transaction thought-experiment (but one which could be executed in principal) replication with external deals would inflate the balance sheet characteristics like amount and tenor of originated and replication transaction should match as close as possible cumbersome if exercised on individual basis (odd tenor, small amount, ) solution: central internal refinancing department (treasury) Liquidity Risk Corp. Dr. Robert Fiedler Transfer Pricing p 5 / 28 LRC GmbH & Co. KG do not distribute - robert.fiedler@liqriskc.com

6 Matched Replication (Example Loan) internal replication Chinese wall internal counterparty replication of replication???% 10 Mio / 5Y 10 Mio / 5Y external counterparty originator treasury 7% 5%???% margin = 2% external internal nominal external counterparty interest Liquidity Risk Corp. Dr. Robert Fiedler Transfer Pricing p 6 / 28 LRC GmbH & Co. KG do not distribute - robert.fiedler@liqriskc.com

7 Matched Replication - Issues the originating department concludes the originated transaction T Ω with an external party at the same moment an internal transaction, the internal replication T R is contracted between the originating department and the treasury which cannot be changed in the hindsight the originating department has thereafter no further responsibilities for the external replication of T R an eventual deviation of the occurring payments from their forecasts the treasury however can execute an external replication of the internal replication T R : - immediately or deferred, fully, partly - or not the cost elements of the internal replication are constituted ex ante from forecasted (scheduled) cash flows e.g. risk neutral rate + liquidity premium, broker costs... liquidity hedging is methodologically straightforward interest rate hedging requires higher technical efforts deviations from the forecast: the costs of eventual detrimental changes (realized vs. forecasted payments) should also be included ex ante into T R Liquidity Risk Corp. Dr. Robert Fiedler Transfer Pricing p 7 / 28 LRC GmbH & Co. KG do not distribute - robert.fiedler@liqriskc.com

8 Liquidity Replication Assuming Scheduled CFs the originated transaction T Ω (closed in t 0 ) determines future payments which are forecasted with scheduled cash flows: CF Ω 0, CF Ω 1, CF Ω 2,, CF Ω N the treasury purchases the scheduled CFs from the origination department it could neutralize its liquidity risk fully by generating a matching internal liquidity replication transaction T LR with symmetrical cash flows: CF LR n = CF Ω n the sum T Ω +T LR is illiquidity risk free: CF LR n+cf Ω n = 0 (for all t n ) T Ω +T LR however is not suitable to calculate earnings / NPVs because NPV(CF LR n+cf Ω n) = NPV(0) = 0 Liquidity Risk Corp. Dr. Robert Fiedler Transfer Pricing p 8 / 28 LRC GmbH & Co. KG do not distribute - robert.fiedler@liqriskc.com

9 Liquidity Replication Assuming Scheduled CFs originated transaction T Ω liquidity replication T LR Liquidity Risk Corp. Dr. Robert Fiedler Transfer Pricing p 9 / 28 LRC GmbH & Co. KG do not distribute - robert.fiedler@liqriskc.com

10 Interest Replication Assuming Scheduled CFs the originated transaction T Ω (closed in t 0 ) determines future payments which are forecasted with cash flows: CF Ω 0, CF Ω 1, CF Ω 2,, CF Ω N we construct a plain vanilla floater F PV by requiring: the nominal flow of the originated transaction T Ω and F PV are identical CF Ω 0 = CF PV 0 the redemption flow of F PV is symmetric to the nominal flow: CF PV M = CF PV 0 the term structure t 1, t 2,, t M of F PV is regular; e.g. 1 month, 1 day * ) the interest flows of F PV are given by: CF PV m = CF Ω 0 ρ PV (t m t m+1 ) assumption: the NPV of T Ω and F PV is identical: NPV(F PV ) = NPV(T Ω ) determines the rate ρ PV : NPV(F PV ) = CF Ω 0 M CF PV 0 + m{ m CF Ω 0 ρ PV (t m t m+1 )} = NPV(T Ω ) * ) a very short reference rate (e.g. EONIA) enables to calculate profits for arbitrary terms Liquidity Risk Corp. Dr. Robert Fiedler Transfer Pricing p 10 / 28 LRC GmbH & Co. KG do not distribute - robert.fiedler@liqriskc.com

11 Scheduled Interest Replication With a Plain Vanilla Floater originated transaction T Ω interest replication floater (plain vanilla) T PV real internal rate of return ρ PV Liquidity Risk Corp. Dr. Robert Fiedler Transfer Pricing p 11 / 28 LRC GmbH & Co. KG do not distribute - robert.fiedler@liqriskc.com

12 Scheduled Interest Replication - Decomposition of Margins the originated transaction T Ω is converted into the plain vanilla floater T PV if the bank would replicate T Ω with F PV, there would be no profit: NPV(T Ω )=NPV(F PV ) consider floaters with different rates ρ but identical structure as F PV : a (hypothetical) bank with no credit risk could enter into a floater F R0 with the risk free rate ρ R0 (NPV(F R0 ) = 0) assume the bank could issue a floater at the rate ρ PV + the replication floater F R the difference to the risk free rate (the bank s funding margin) can be interpreted as the price the bank has to pay for its own credit risk the profit margin is determined as the difference between the rates of the plain vanilla floater F PV and the replication floater F R : = ρ PV ρ 0 Liquidity Risk Corp. Dr. Robert Fiedler Transfer Pricing p 12 / 28 LRC GmbH & Co. KG do not distribute - robert.fiedler@liqriskc.com

13 Scheduled Interest Replication - Decomposition of Margins real internal rate of return ρ PV rate of the plain vanilla floater profit margin funding margin risk free rate ρ 0 Liquidity Risk Corp. Dr. Robert Fiedler Transfer Pricing p 13 / 28 LRC GmbH & Co. KG do not distribute - robert.fiedler@liqriskc.com

14 Basal Liquidity Risk Methods Liquidity Risk Corp. Dr. Robert Fiedler Transfer Pricing p 14 / 28 LRC GmbH & Co. KG do not distribute - robert.fiedler@liqriskc.com

15 Illiquidity Risk Forecasting the Bank s Nostro Account counter balancing capacity comfort zone the bank s nostro negative headroom doom future liquidity exposure Liquidity Risk Corp. Dr. Robert Fiedler Transfer Pricing p 15 / 28 LRC GmbH & Co. KG do not distribute - robert.fiedler@liqriskc.com

16 Illiquidity Risk Forecasting the Bank s Nostro Account counter balancing capacity comfort zone positive headroom doom future liquidity exposure Liquidity Risk Corp. Dr. Robert Fiedler Transfer Pricing p 16 / 28 LRC GmbH & Co. KG do not distribute - robert.fiedler@liqriskc.com

17 Future Cash Flows (FCF) / Future Cash Inventories (FCI) cash inflows inventory 0 net CF 0 net CF 1 inventory 2 inventory -1 net CF 2 net CF 3 inventory 1 net CF 0 net CF 2 inventory 3 cash outflows t -1 t 0 t 1 net CF 1 t 2 t 3 net CF 3 Liquidity Risk Corp. Dr. Robert Fiedler Transfer Pricing p 17 / 28 LRC GmbH & Co. KG do not distribute - robert.fiedler@liqriskc.com

18 Funding (Illiquidity) Risk: Economic Approach (1) prognosis of the bank s future liquidity situation: Forward Liquidity Exposure (FLE) (2) bank s capability to compensate a negative liquidity forecast: Counter Balancing Capacity (CBC) (1) + (2): FLE + CBC > 0 FLE and CBC: have a time dimension: FLE(t) + CBC(t) > 0 depend on future payments (cash flows) which are uncertain by design depend on not already existing (hypothetical) transactions Liquidity Risk Corp. Dr. Robert Fiedler Transfer Pricing p 18 / 28 LRC GmbH & Co. KG do not distribute - robert.fiedler@liqriskc.com

19 Practical Realisation of FLE Liquidity Risk Corp. Dr. Robert Fiedler Transfer Pricing p 19 / 28 LRC GmbH & Co. KG do not distribute - robert.fiedler@liqriskc.com

20 CounterBalancing Capacity (CBC) - Definition CBC is a specific scenario (a strategy) with the target: simulate the bank s maximal possible cash inflow generation by using the following liquidity options the bank is long: balance sheet expansion: secured or unsecured refinancing through: new repos / borrowing from new clients drawings under assumed / contractual credit facilities taken issuing of debt balance sheet reduction: sale of assets final sale sale and buy back as the CBC is a strategy, its implementation might involve costs: the buffer needs to be refinanced; if the credit quality of the assets is higher than the bank s own credit standing negative income (cost of carry) cost from repo transactions have to be compared with normal borrowing costs eventual sales transactions might lead to irreversible costs Liquidity Risk Corp. Dr. Robert Fiedler Transfer Pricing p 20 / 28 LRC GmbH & Co. KG do not distribute - robert.fiedler@liqriskc.com

21 Mit Sicherheit flüssig Liquiditätsrisiken managen im Zeichen von Basel III Liquidität zu optimalen Kosten bereitzustellen 21 Copyright 2010, 2012, SAS Institute Inc. All rights reserved.

22 5 Schritte zum Management von Liquiditätsrisiken Liquiditätskennzahlen ermitteln und reporten Künftige Liquiditätsentwicklung der Bank frühzeitig abschätzen Simulation zur Liquidität schnell und valide durchführen Liquiditätstransferpreise ermitteln und in die Steuerung integrieren Liquiditätsriskomanagement als Wettbewerbsfaktor der Banksteuerung 22 Copyright 2012, SAS Institute Inc. All rights reserved.

23 Liquiditätskennzahlen ermitteln und reporten Ziel Neue Kennziffern reporten und danach steuern Problem Neue komplexe Daten und neue Konzepte für die Steuerung werden benötigt Lösung Automatisierte Datenbeschaffung und Datenqualitätsprozesse Neue Attribute / Datenstrukturen für die Einteilung der Geschäfte Neue bisher nicht vorhandene hypothetische Geschäfte Berechnung von LCR und NSFR inklusive Liquiditätspuffer Fertige Standard-Reports für LCR und NSFR (u.a. auch FSA 47 / 48) und Ad-Hoc-Reporting 23 Copyright 2012, SAS Institute Inc. All rights reserved.

24 SAS Framework for Liquidity Mapping MAP LIQUIDITY CATEGORY Map to Regulatory Report Hierarchies Use different configurations per entity for local regulatory reports MAP LIQUIDITY FACTOR 24 Copyright 2012, SAS Institute Inc. All rights reserved.

25 Liquiditätsentwicklung frühzeitig abschätzen Ziel Variable Sichten auf Cashflows erzeugen Problem Einzelcashflows nicht vorhanden bzw. nicht simulationsfähig Statische Sichten ohne flexible BI Strukturen Lösung Flexible Auswertungsmöglichkeiten zur Echtzeit aufgrund von In-Memory Reporting und parellelen In-Memory Verarbeitungen mit High Performance Analytics Generierung / Einbindung von Cashflows auf Einzelgeschäftsebene zur Simulation Simulationsumgebungen auf einheitliche Datenbestände mittels PlayPen Konzept 25 Copyright 2012, SAS Institute Inc. All rights reserved.

26 Den Sonderfall Testumgebung als Normalzustand Arbeit an Business Szenarien ist Grundlage der SAS Architektur (PlayPen Prinzip) Prozessteuerung Play Pen Verwaltung Result Publishing DWH Shared Data Mart Portfolio- und Marktdaten Risikofaktoren und Konfiguration Einheitliche Methoden bibliothek Selektion von: Mandant(en) User- bzw. Shared Risikoart (Credit, Market, ALM, Firmwide) Portfolio- und Marktdaten Risikofaktoren und Konfiguration Methoden bibliothek PlayPen (Beliebig viele) Risk Engine Instanz Selektion von: Private Reporting Shared Reporting Push von Ergebnissen Private Risk Reporting Repository Shared Data Mart Shared Risk Reporting Repository Szenariobasiert Historisiert Audit Unterstützung User- und Shared Sichten Pull Methoden Promotion 26 Copyright 2012, SAS Institute Inc. All rights reserved.

27 Simulation zur Liquidität Ziel Ist-Situation und zukünftige Cashflow Entwicklung simulieren Problem zukünftige Zahlungsfähigkeit nicht abschätzbar Lösung Analytics für den Einsatz von Szenarien / Simulationen / Stresstests Echtzeit Simulation mittels High Performance Gesamtlösungskonzept Erstellung und Ausführung von Ad-Hoc-Simulation direkt durch Business User Einbindung von What-If-Simulations-ergebnissen in das Tagesgeschäft durch High Performance Analytics 27 Copyright 2012, SAS Institute Inc. All rights reserved.

28 SAS Framework for Liquidity Scenario Cash Flows DEPOSIT, FACILITY SCENARIO LIQ MGMT CONFIGURATION ASSET HAIRCUTS ROLLOVER SCENARIOS 28 Copyright 2012, SAS Institute Inc. All rights reserved.

29 Liquiditätstransferpreise Ziel Berücksichtigung der Liquiditätskosten im Pricing Problem Liquidität kostet Geld Keine Einbindung der Liquiditätssteuerung in Steuerungs-prozesse Lösung Einbindung der Liquiditätskosten als Liquidity- Spread unter Berücksichtigung der einzelnen Kostenbestandteile Management des Liquiditätspuffers (CBC / HQLA) Hinterlegung eines Notfall-Fundingplan (CFP) Optimierungsalgorithmen für CBC / High Quality Liquid Assets durch SAS 29 Copyright 2012, SAS Institute Inc. All rights reserved.

30 Optimal Liquidity Hedging One of the most challenging aspects of the new regulation is that banks now need to continuously manage a dedicated liquidity portfolio and that the adequacy of this portfolio in hedging liquidity outflows needs to be frequently tested Two general approaches to liquidity hedging in banking industry Acquiring more assets that can generate future cash flows that can complement the potential net cash outflows (hedging with contractual cash flows, structural liquidity mismatch) Dynamic counterbalancing capacity through use of asset sales and repo agreements to generate liquidity at the exact time when net contractual cash flows cannot balance by itself (Basel III liquidity portfolio) 30 Copyright 2012, SAS Institute Inc. All rights reserved.

31 SAS Framework for CBC Simple Model CBC ANALYSIS LIQ MGMT CONFIGURATION Schedule of inventory changes Schedule of prices Schedule of hypothetical asset repurchase agreements Schedule of hypothetical asset sales Schedule of repurchase quantity haircuts 31 Copyright 2012, SAS Institute Inc. All rights reserved.

32 Liquidity Reserves Management Stock of Liquid Assets Buffer Liquidation Profile of Security Group: Cash generated from Corporate Securities Actual utilization of Corporate Securities to Generate Cash under Stress Level 2 scenario Run Down on Stock of Liquid Asset and Cash Generating Strategies 32 Copyright 2012, SAS Institute Inc. All rights reserved.

33 Liquiditäts-Riskomanagement zur Banksteuerung Ziel Einbindung des Liquiditätsmanagements in den Steuerungsprozess Problem Liquidität ist nicht unbegrenzt verfügbar Inkonsistenz durch heterogene Planungsprozesse Lösung Workflowsteuerung als Gesamtprozess Einbindung der Liquisteuerung in ein Gesamtframework zur Steuerung Weiterführung des FLE zum Forecast des FLEs und damit Einbindung in den Planungsprozess Zentrale Nutzung von Werkzeugen durch unterschiedliche Steuerungsdisziplinen 33 Copyright 2012, SAS Institute Inc. All rights reserved.

34 SAS Institute Führendes Softwarehaus für die integrierte Unternehmenssteuerung Weltweit vertrauen mehr als Finanzdienstleister - darunter 97% der FORTUNE Global 500 Banken - auf Softwarelösungen von SAS. Dr. James H. Goodnight CEO & Gründer von SAS Größtes Softwareunternehmen in privater Hand Gegründet 1976 in Cary, North Carolina Mitarbeiter in 52 Ländern Seit 1982 mit über 500 Mitarbeiter in 6 deutschen Niederlassungen Das Urteil der Analysten Dauerhafte Mehrwerte durch prämierte Lösungen für Banken Umsatzentwicklung Umsatz Int. 2,73 Mrd. US$ Umsatz Dtl. 128 Mio. Investition in F&E: > 23 % 34 Copyright 2010, SAS Institute Inc. All rights reserved.

35 Sprechen Sie mit unseren Experten SAS Forum Deutschland 2012 (6.-7. November in Mainz) Whitepaper zum Liquiditätsrisiko unter: Experte: Carsten Krah Copyright 2010, SAS Institute Inc. All rights reserved.

36 The Price of the Uncertainty of the Originated Transaction Liquidity Risk Corp. Dr. Robert Fiedler Transfer Pricing p 36 / 28 LRC GmbH & Co. KG do not distribute - robert.fiedler@liqriskc.com

37 Matched Replication: Consequences for the Treasury the treasury has purchased the internal replication transaction from the origination department: its liquidity replication exposure is directly determined by the originated transaction T Ω its interest rate replication exposure is determined by the replicating floater F R every forecast bears uncertainty: expected deviations from the forecast can be predicted and its costs added : negative CF deviations are detrimental per se for illiquidity risk for interest rate risk, disutility also depends on the shape / change of the yield curve unexpected aberrations from the forecast can also be estimated: interest rate driven losses (change of CF + yield curve) require loss reserves (capital) the estimation of the magnitude of the loss drives the cost of capital unexpected liquidity deficits can only be matched by CounterBalancing Capacity; like capital, the CBC needs to be acquired a priori which drives the cost of CBC Liquidity Risk Corp. Dr. Robert Fiedler Transfer Pricing p 37 / 28 LRC GmbH & Co. KG do not distribute - robert.fiedler@liqriskc.com

38 The Price of the Compliance With Basel III Liquidity Risk Corp. Dr. Robert Fiedler Transfer Pricing p 38 / 28 LRC GmbH & Co. KG do not distribute - robert.fiedler@liqriskc.com

39 B3 Basel III: Global Regulatory Framework B3.A Global Capital Framework Part 1 Minimal Capital Requirement & Buffer B3.B Global Liquidity Standard B3.A.I Definition of Capital B3.A.II Risk Coverage B3.B.1 LCR - Liquidity Coverage Ratio B3.A.III Capital Conservation Buffer B3.B.2 NSFR Net Stable Funding Ratio B3.A.IV Countercyclical Buffer B3.B.3 Monitoring Tools B3.A.V Leverage Ratio 3 Presentation title Basel III: A global regulatory framework for more resilient banks and banking systems December 2010 Liquidity Risk Corp. Dr. Robert Fiedler Transfer Pricing p 39 / 28 LRC GmbH & Co. KG do not distribute - robert.fiedler@liqriskc.com

40 LCR Liquidity Coverage Ratio Basel III requires in the Liquidity Coverage Ratio (LCR) that the bank cumulates its total net cash outflows (TNCO) of the first 30 calendar days and compares this with the stock of high-quality liquid assets (HLA) the inequality to be met by the bank is expressed in the form of a ratio: stock of highly liquid assets total net cash outflows over the next 30 calendar days > 100% reflects CBC / FLE > 1 * ) CBC > FLE CBC + FLE > 0 * ) the total net cash outflows are positive in the LCR Liquidity Risk Corp. Dr. Robert Fiedler Transfer Pricing p 40 / 28 LRC GmbH & Co. KG do not distribute - robert.fiedler@liqriskc.com

41 How Can A Bank Improve its LCR reasons for a bad LCR the bank s TNCO is too high: too many outflows from maturing liabilities - if compared with the inflows from maturing assets the bank owns not enough HLA assets (or an insufficient portion of level 1 assets) if the bank is fully match-funded: the HLA will not match the net cash outflows (TNCO) due to the 75% rule: TNCO := outflows min{inflows; 75% of outflows} possible tactical improvements with immediate effect: decreasing the denominator TNCO and/or increasing the numerator HLA requires additional funding and thus worsens the TNCO the period return of the bond (HLA eligible) needs to be risk adjusted held against the period cost of the new refinancing adjustment for the usability time (minus last month) of the bond in the LCR Liquidity Risk Corp. Dr. Robert Fiedler Transfer Pricing p 41 / 28 LRC GmbH & Co. KG do not distribute - robert.fiedler@liqriskc.com

42 Liquidity Risk Corp. Dr. Robert Fiedler Transfer Pricing p 42 / 28 LRC GmbH & Co. KG do not distribute - robert.fiedler@liqriskc.com

43 The Cost of the LCR: Example the originator gives a loan of 100 for 5 y to an external counterparty the treasury replicates 100 for 5 y internally 1 the treasury fully replicates 100 for 5 y externally economic view: net CFs = = 0 (in 5 y ) regulatory view: TNCO = min{100; 75% of 100} = = -25 requires coverage with 25 HLA 2 the treasury replicates only 20 for 5 y (the rest O/N) externally economic view: net CFs = = -80 (in 5 y ) regulatory view: TNCO = min{20; 75% of 100} = = -80 requires coverage with 80 HLA but the originator has paid for a fully matched replication! 3 the treasury externally replicates 75 for 5 y (the rest O/N) externally economic view: net CFs = = -25 (in 5 y ) regulatory view: TNCO = min{75; 75% of 100} = = -25 requires coverage with 25 HLA an open position (not match funded) of 25 comes for free in the LCR Liquidity Risk Corp. Dr. Robert Fiedler Transfer Pricing p 43 / 28 LRC GmbH & Co. KG do not distribute - robert.fiedler@liqriskc.com

44 The Cost of the LCR: Internal vs. External for the bank: complicated situation, depends on the individual balance sheet for the originator: assumption that the originated transactions are match-funded economic view: inflows and outflows are fully matched in the LCR, however the net cash outflows (TNCO) will not match due to the 75% rule: TNCO := outflows min{inflows; 75% of outflows} the 25% deficit needs to be covered by HLA for the 25% HLA the difference between income and funding expense is a regulatory cost that the originator should bear the optimal tenor of HLA needs to be determined for the treasury: eventual additional cost from not-match-funded actual replication cannot be allocated to the originator but this can be substantial! works only for new business clearest solution is to reset the FTP with the residual maturities of the existing transactions (with the old rates) Liquidity Risk Corp. Dr. Robert Fiedler Transfer Pricing p 44 / 28 LRC GmbH & Co. KG do not distribute - robert.fiedler@liqriskc.com

45 Liquidity Modelling from Robert Fiedler Liquidity Risk Corp. Dr. Robert Fiedler Transfer Pricing p 45 / 28 LRC GmbH & Co. KG do not distribute - robert.fiedler@liqriskc.com